The Effect Of Accounting Conservatism And Life-Cycle Stages On Firm Valuation

Abstract

This paper investigates how accounting conservatism affects the value-relevance of accounting information under different economic attributes. A firm’s value is driven by the underlying economics, such as its production function, investment opportunity set, and risk. The corporate life-cycle stage can capture general differences in these underlying economics. From the perspective of the Feltham and Ohlson (1995)’s valuation model, this suggests that firms in different life-cycle stages have different financial characteristics that affect the value-relevance of the accounting information. Their valuation model depicts theoretically that, under conservative accounting, the expected growth in net operating assets affects a firm’s market valuation. This paper predicts that the pricing multiples of the value components of the valuation model will differ in different corporate life-cycle stages and accounting conservatism will have a joint effect with the life-cycle stage on the value-relevance of accounting information. This study conducts its hypothesis tests using comprehensive proxies such as conservatism estimates from the valuation model and corporate life-cycle stages.  These enable this study to examine the overall effects of accounting information, accounting conservatism as well as economic attributes on firm value. According to those comprehensive proxies, sample firms are classified into two conservatism groups, and three life-cycle stages. The results of this study provide evidence that accounting conservatism has a joint effect with the life-cycle stage on the value-relevance of accounting information.